Seminar questions Computational Methods for Finance

Seminar Solutions: Time Value of Money



Q1
A principal amount of £5,000 is invested for 3 years at an annual interest rate of 6%.
(a) Calculate the future value (FV) using Simple Interest.
(b) Calculate the future value (FV) using Compound Interest, assuming annual compound-
ing.
(c) Compare the results and explain the difference.


Q2
You invest in an ordinary annuity that pays £2,000 at the end of each year for 5 years.
The annual discount rate is 7%. Calculate the present value (PV) of this annuity.


Q3
A rental agreement requires payments of £1,500 at the beginning of each year for 4 years.
The annual discount rate is 6%. Calculate the present value (PV) of this annuity due.


Q4
A preferred stock pays a dividend of £120 annually, indefinitely. The required rate of
return is 4%. Calculate the present value (PV) of this perpetuity.


Q5
A principal amount of £2,500 is invested for 5 years at a continuously compounded annual
interest rate of 8%. Calculate the future value (FV).


Q6
An investment will grow to £5,000 in 4 years at a continuously compounded annual
interest rate of 7%. Calculate the present value (PV).

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